International monetary policy shocks and Irish market rates

Abstract

The influence of international interest rate changes on the Dublin interbank money market rates (Dibor) is investigated. Specifically, the impact of (un)expected changes in German(Euro) area and US policy rates on various Dibor rates between 1991 to 2002 is analysed in an event type study. Decomposition of (un)expected changes of policy rates are based on future markets and is akin to the method of Kuttner. Overall, results suggest that Dibor rates respond positively and significantly to unanticipated Euro and US policy rate changes while expected changes have an insignificant impact.

Acknowledgements

The views expressed are our own and do not necessarily reflect the views of the ESCB or the staff of the Central Bank of Ireland.

Notes

¹ Research, for example, by Gallagher (1995) and Gallagher and Twomey (1998) have investigated linkages between Irish and international stock market.

² Lack of data at a daily frequency prohibit looking at longer maturities.

³ Both Wu (2002) and Evans and Marshall (1998) find that the impact of an exogenous monetary policy shock on interest rates falls as we move out the maturity spectrum.

⁴ If on day t, the players in the futures market expected a change in Fed policy on day t + 1 and no further changes were anticipated. Then the federal funds futures rate on day t of month s, would encompass the average of realized funds through that date and expectations about rates after that date.

⁵ Poole and Rasche (2000) use the 1 month ahead futures contract as a proxy for the unanticipated element of policy rate change while Cochrane and Piazzesi (2002) use the euro dollar contract.

⁶ Euribor stands for Euro Interbank Offered Rate.

⁷ We are unable to examine the impact of (un)anticipated changes in the domestic Irish policy rate prior to EMU due to the lack of a futures market for Ireland.

⁸ As in Poole and Rasche (2000), we use the one month ahead federal funds future's contract.

⁹ These authors don’t report results for expected changes in the policy rate.

¹⁰ The change is where t is the day of the policy announcement. The change in the Dibor rates (data taken from Bloomberg) must take account of the time difference between the USA and Ireland and hence is calculated as where t is the day of the policy announcement.